“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
The Warren Buffett investment philosophy calls for a long-term investment horizon, where a ten year holding period, or even longer, would fit right into the strategy. How would such a strategy have worked out for an investment into The Gap Inc (NYSE: GPS)? Today, we examine the outcome of a ten year investment into the stock back in 2010.
|Average annual return:||-6.46%|
As shown above, the ten year investment result worked out poorly, with an annualized rate of return of -6.46%. This would have turned a $10K investment made 10 years ago into $5,129.24 today (as of 05/22/2020). On a total return basis, that’s a result of -48.69% (something to think about: how might GPS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that The Gap Inc paid investors a total of $7.54/share in dividends over the 10 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).
Based upon the most recent annualized dividend rate of .97/share, we calculate that GPS has a current yield of approximately 11.81%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .97 against the original $21.22/share purchase price. This works out to a yield on cost of 55.66%.
One more piece of investment wisdom to leave you with:
“While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.” — Seth Klarman